Professor
Paola Sapienza examines the role of culture in economic decisions

By
Kari Richardson

Do Koreans save more than the British? Are Eastern Europeans
more reluctant to invest in stocks? Do Brazilians mistrust
financial markets? While modern commerce may be global and
pay little attention to national borders, people can retain
a kind of economic heritage based on culture that influences
their views in provincial ways.

Kellogg
School Associate Professor of Finance Paola
Sapienza in her recent work examines how culture affects
economic systems. A Sicilian by birth, Sapienza and her two
co-authors, also Italians, pursued the research after one
of them admitted being uncomfortable sending a check through
the mail despite having lived in the U.S. for nearly 15 years.

Apparently
old habits die hard.

"You
would never send a check by mail in Italy," says Sapienza,
"because the mailman would steal it for sure. My co-author
was surrounded by people who said it was safe, but still he
refused."

"Culture"
has long occupied a diminished place in economic research.
For years many economists have ascribed to economic systems
the power to influence culture, but have given little credit
to the reverse theory — that culture might have the
power to influence economics.

In
her 2006 paper, "Does Culture Affect Economic Outcomes?"
published in The Journal of Economic Perspectives,
Sapienza and co-authors Luigi Guiso and Luigi Zingales take
a more penetrating look at culture's role in influencing economic
phenomena.

"In
recent years, economists have begun to apply their analytical
frameworks and empirical tools to the issue of culture and
economic outcomes," the three scholars write. "Better
techniques and expanded data have made it possible to identify
systematic differences in people's preferences."

"Culture
has always been dismissed by most economists," says Sapienza,
who is also a faculty fellow in the Kellogg
School's Zell Center for Risk Research. "In the last
five or 10 years there has been a shift. Researchers are saying,
'If it is the case that culture plays no major economic role,
then at least there are some inconsistencies.'" The authors
define culture as "those customary beliefs and values
that ethnic, religious and social groups transmit fairly unchanged
from generation to generation."

As
an example, Sapienza cites the habits of first-generation
immigrants, who tend to behave more like those in the country
they left behind than those in the country where they currently
live. Cultural heritage, she says, citing research by Fernández,
Fogli and Olivetti, affects American women's decisions about
how many children to have and whether or not to work, despite
all sharing the same economic environment.

Similarly,
the issue of how individuals decide how much money to save
— one that has long perplexed economists — might
be linked to culture. Says Sapienza: "Savings is one
of those behaviors that is very hard to explain with economic
theories. Researchers have ideas, but it's very difficult
to explain the differences between various countries. Once
you correlate the explanation with the data, you typically
don't learn very much."

Average
savings rates from 1970 to 1994, corrected for a country's
Gross Domestic Product, show clearly that Americans and the
British, on average, tend to save far less than their counterparts
in Norway, Portugal, Spain and Japan. The interesting part,
though, is that a German or Norwegian person who has relocated
to America tends to behave similarly to those in her home
country.

It
is unclear how long these differences persist, but it appears
that many endure. Cultural norms tend to change slowly, in
large part because parents tend to pass along attitudes inherited
from their own parents, whether or not the views still apply
under the family's new social conditions. For instance, Sapienza
says that some African religions once banned the eating of
meat, a dictate that made sense in a sweltering climate where
microbes multiplied quickly and could make people sick. But
religious faithful who moved to northern climates held tight
to the practice, she says, even though it no longer made sense
from a practical standpoint.

Lessons
learned the hard way have particular staying power, permeating
a culture for generations. One of Sapienza's favorite examples
comes from the 1999 Martin Scorsese documentary "Mio
viaggio in Italia" ("My Voyage to Italy"),
during which the famous director describes why Sicilian immigrants
in New York live in apartment buildings on the same street,
yet do not speak to each other: "[T]he lesson of survival
that was passed over for centuries and was carried over to
the New World is a pretty brutal one, and that is: you think
twice before you trust anybody outside your family,"
says Scorsese. "Think about it. Your country, your homeland
changes hands again and again over thousands of years. So,
who can you trust? The government? The police? The church?
No. Only your family, only your own blood."

Part
of the explanation for the persistence of cultural beliefs
is efficiency — it makes little sense to learn something
over and over, so people tend to tackle an issue once and
forget about it. When Americans visit London, for example,
they tend to have a disproportionately large number of accidents
crossing the street, something researchers trace back to an
automatic tendency to glance toward the left side even though
traffic in the U.K. will first approach from the right. "You
learn a rule of thumb and move it to a different environment,"
Sapienza says.

Though
the consequences are not as life threatening, Sapienza compares
the London tourist scenario to Russian immigrants who grew
up mistrusting the stock market in their home country —
with good reason. "When they come to the United States,
they are never going to make a switch. Their immediate reaction
is to mistrust. They have a very biased view that could have
lifelong financial effects," she says.

Researchers
such as Sapienza have been trying to determine how and when
to introduce concepts that might influence a person's financial
future for the better. "The big challenge is whether
education could undo some of [these cultural biases] and at
what age you need to act," she says. "Is there a
time during which you can intervene?"

To
help answer such questions, Sapienza is working on a study
that will follow some 500 MBA students over a 40-year period
to examine, among other factors, how their attitudes toward
various financial topics change when influenced by particular
academic frameworks.